Is China a safe bet?

January 27, 2021  |  Michael Reilly

Hello ADAPT readers!

As long time readers know, I talk all the time about the importance of understanding inter-market relationships and relative strength ratios that exist between Asset Classes.

And based on my previous posts, it should come as no surprise to hear that stocks around the world have been breaking out all over the place for months.

It’s happening in Europe’s largest economy – Germany, it’s happening in emerging market countries like Taiwan and South Korea. Even Japan is finally breaking out after it’s 30 year slumber.

And it’s been happening in the world’s second largest economy – China. And that’s our focus today.

Here’s a price chart of the Shanghai Composite Index. What we’re seeing right now (far right of chart) looks an awful lot like what the chart looked like prior to its two previous big moves higher after 2005 and 2015. I don’t see why this time is any different – do you?

It’s hard to imagine, but back in March of 2020, while the world was in the depths of the market crash, Chinese Technology stocks were actually breaking out to new multi-year highs relative to the S&P 500.

And they haven’t slowed down!

Here’s the Invesco Chinese Tech Index Fund CQQQ  breaking out to new all-time highs. Notice how it’s breaking out relative to the Nasdaq100 Index (using QQQ) – – lower blue line chart.

For a more apples-to-apples comparison, here’s Chinese Tech vs U.S. Tech. Chinese tech is breaking out to new multi-year highs.

With this ratio back above those key 2012 lows – China is officially the leader, not the United States: Its Chinese Tech over U.S. Tech on a relative basis.

I’m including the top 5 holdings of CQQQ and another Chinese Tech ETF – KWEB. I encourage investors to dive into the components of these ETFs and see if something catches your eye. Of course, if you prefer a more diversified strategy, take a look at either of these ETFs

Invesco China Tech ETF CQQQ Holdings (ytd):

KraneShares trust KWEB Holdings (ytd):

Equities all over the world are showing resilience as they break out of prior consolidations or above previous downtrends. It’s exciting and there is a strong likelihood that the trend continues to offer many investment opportunities – HOWEVER, nothing goes up in a straight line, so pullbacks should be expected, not feared. It’s when the trend reverses that investors need to be nimble.

As always, a reminder to all investors, believe it or not, I don’t know what’s going to happen. There’s rarely a sure thing out there. All any of us can do is analyze the behavior of the markets and ADAPT accordingly. But, for my money, the best way I know to add clarity to the markets and avoid the hype, noise and emotion is through the use of ratio charts like the ones above.

Until next time, good hunting and invest wisely.

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